Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Monday, February 08, 2010

Rental yields, slight return

Let's just bash this one into the ground, shall we? Via Felix, a bit of fluff on the London property market, by one of those American financial commentators of the sort who often give off the impression that they'd be a lot happier if they and their countrymen wore the toga, as in the good old days of the Imperium. How strange we Londoners are with our valuable houses and expensive taxis! Of course we can't afford them, because the man from the Wall Street Journal can't and, well, civis Romanus sum! So we must be the equivalent of those funny Neapolitan counts that Norman Lewis wrote about, desperately trying to keep up appearances while starving to death. The alternative hypothesis - that these funny drinky-stabby-crooked-teethy people are an actual country of 60 million people, whose capital city sustains a daytime population of 7 million people, many of them in jobs that pay better than the Wall Street Journal - is too strange to contemplate.

But anyway, putting my national amour propre to one side, let's look at the numbers on this "bubble". An apartment overlooking Hyde Park costs "$1.5million"! That's a hell of a lot compared to a much larger condo in Florida, or a mansion out in Wisconsin or ...

... but what with this being a market economy and all, we don't value properties based on their square footage, or their similarity to another property in a completely different location. We assesses their value by one method and one method alone; the method of comparing the value to the monthly rent. Looking on the Foxtons' website reveals that similar apartments are renting for about £775/wk, which would imply a rental yield of about 4%. That's not all that great in my opinion, and I don't think I'd be a buyer at that level for a landlord investment, but it's not what I'd call a bubble, is it?

Felix actually notes this! "On the other hand, the UK avoided two aspects of the US bubble: the originate-to-distribute business model, which destroyed underwriting standards; and the soaring ratio between the cost of buying and the cost of renting"

Well yes. Except "the soaring ratio between the cost of buying and the cost of renting" is hardly a minor technical detail and it's not "an aspect" of a bubble - it's the exact definition of what the difference is between a bubble (when valuations become detached from the cash flows underpinning them), and a period of strong economic growth combined with low interest rates (which is what the UK actually had).23 comments this item posted by the management 2/08/2010 01:09:00 AM